Deck 15: Money and the Financial System

Question 1

In a barter system,

A)trade will only occur if there is a double coincidence of wants
B)an individual offers money to get a good or service
C)an individual offers a good or service to get money
D)different kinds of money are exchanged for each other
E)individuals are self-sufficient

Answer 1

A

Question 2

Which of the following is not a function of money?

A)to act as a medium of exchange
B)to act as a unit of account
C)to act as a store of value
D)to facilitate trade
E)to provide a double coincidence of wants

Answer 2

E

Question 3

Barter works best

A)in the absence of a double coincidence of wants
B)when many different products are available in the economy
C)when money is readily available to establish relative prices
D)when each trader has what the other wants and wants what the other has
E)in highly developed economies with extensive specialization of labor

Answer 3

D

Question 4

Specialization of labor means that

A)production requires a special kind of labor
B)the overall skill level of labor is increasing
C)individuals produce goods that they are relatively good at producing and trade for those that they do not produce
D)individuals achieve self-sufficiency in production
E)exchange within the economy consists of trading in services

Question 5

Barter is the exchange of goods and services without the use of money.

Question 6

The earliest type of exchange involved

A)coins
B)barter
C)commodity money
D)fiduciary money
E)fiat money

Question 7

Exchange is necessary in an economy if

A)output is to be produced
B)output is to be consumed
C)individuals are self-sufficient
D)families are self-sufficient
E)labor is specialized

Question 8

In a barter system,

A)an individual offers one good or service to get another good or service
B)an individual offers money to get a good or service
C)an individual offers a good or service to get money
D)different kinds of money are exchanged for each other
E)individuals are self-sufficient

Question 9

Barter is the direct exchange of goods and services for

A)any kind of money
B)other goods and services
C)either goods or money
D)commodity money
E)foreign currency

Question 10

As the number of goods and services increases, barter becomes

A)easier because the chance of there being a double coincidence of wants increases
B)harder because the chance of there being a double coincidence of wants increases
C)easier because the chance of there being a double coincidence of wants decreases
D)harder because the chance of there being a double coincidence of wants decreases
E)easier because people have more choice

Question 11

Which of the following best illustrates the double coincidence of wants?

A)Both Tom and Jerry would like to purchase the same good.
B)Tom has something he's willing to trade to Jerry; Jerry has something he's willing to trade to Tom.
C)Tom and Jerry have very similar tastes; hence, Tom's wants coincide with Jerry's.
D)Tom has something he's willing to trade to Jerry, who wants it; Jerry has something he's willing to trade to Tom, who wants it.
E)Tom has something Jerry wants; Jerry has something Tom wants.

Question 12

The greater the degree of specialization in the economy,

A)the easier it is to discover a double coincidence of wants
B)the more feasible a barter system is
C)the less likely it is that monetary exchange will develop
D)the harder it is to negotiate an exchange rate between all pairs of goods
E)the more likely it is that individual consumers are self-sufficient

Question 13

In a barter system,

A)it is difficult to keep track of the relative values of goods and services
B)an individual offers money to get a good or service
C)an individual offers a good or service to get money
D)different kinds of money are exchanged for each other
E)individuals are self-sufficient

Question 14

Which of following is not an important characteristic of money?

A)general acceptability
B)has commodity value
C)divisibility
D)has stable value
E)none of the above

Question 15

To say that money serves as a store of value is to say that money is a useful way to store wealth for future use.

Question 16

Under a system of barter,

A)no rates of exchange are defined
B)there are as many different rates of exchange as there are pairs of goods to trade
C)rates of exchange are expressed in goods per dollar
D)rates of exchange are expressed in dollars per good
E)rates of exchange are denominated in gold or silver

Question 17

Specialization of labor means that

A)production requires a special kind of labor
B)the overall skill level of labor is increasing
C)individuals produce goods other than those they want to consume
D)individuals achieve self-sufficiency in production
E)exchange within the economy consists of trading in services

Question 18

The more specialized labor is,

A)the less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop
B)the less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop
C)the more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop
D)the more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop
E)the more likely it is that individuals are producing only what they want to consume

Question 19

The greater the number of different goods available in an economy,

A)the less likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop
B)the less likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop
C)the more likely it is that a double coincidence of wants will exist, and the less likely it is that monetary exchange will develop
D)the more likely it is that a double coincidence of wants will exist, and the more likely it is that monetary exchange will develop
E)the more likely it is that individuals are producing only goods they want to consume

Question 20

Barter is more feasible in primitive societies than in modern societies because

A)there is no inflation in primitive societies
B)there are many goods available for trade in primitive societies, so people can always find the goods that they want
C)specialization is limited and thus there are few goods available for trade in primitive societies
D)specialization is limited and thus there are many goods available for trade in primitive societies
E)people in primitive societies have limited wants

Question 21

The unit of account function of money

A)all of the following are correct
B)means that money makes price information more accessible
C)requires that money be made of something valuable
D)means that money can be used to save up purchasing power
E)means that money is more easily counted than goods

Question 22

Commodity money is something

A)that has no intrinsic value
B)that has an intrinsic value
C)that is based on a valuable metal
D)whose value never changes
E)whose value changes frequently

Question 23

Suppose that corn is the unit of account in a certain economy. If a pair of tennis shoes exchanges for two bushels of corn and a pair of hiking boots exchanges for twelve bushels of corn, then

A)whether or not a double coincidence of wants exists, all trades have to be made using corn
B)with one pair of tennis shoes, a person will be able to purchase twelve pairs of hiking boots
C)with one pair of tennis shoes, a person will be able to purchase six pairs of hiking boots
D)with twelve pairs of tennis shoes, a person will be able to purchase one pair of hiking boots
E)with six pairs of tennis shoes, a person will be able to purchase one pair of hiking boots

Question 24

According to Gresham's Law, when two kinds of money are in circulation (such as $1 gold coins and $1 silver coins), the preferred--or more highly valued--form of money will tend to predominate, driving the "bad" money out of circulation.

Question 25

Who is famous for his observation that bad money drives out good money?

A)Adam Smith
B)François Quesnay
C)Thomas Gresham
D)John Maynard Keynes
E)J. B. Say

Question 26

Suppose an ocean liner sinks and the passengers become stranded on a lush tropical island. Which of the following is most likely to be most useful as money in the economy that develops among the survivors?

A)the life jackets they put on when leaving the ship
B)beads from the necklaces that were the party favors the night the ship sank
C)the coconuts growing on the island
D)the fish swimming around the island
E)the sand on the island's beaches

Question 27

Inflation is impossible in a commodity money system.

Question 28

Commitments to make or receive payments in the future are made easier by money's function as a

A)unit of account
B)store of value
C)medium of exchange
D)form of barter
E)commodity

Question 29

If two kinds of money are circulating at the same time,

A)one of them must be commodity money
B)one of them must be fiat money
C)one of them must be paper money
D)the poorer quality one will be offered by purchasers of goods and the better one will be hoarded
E)the better quality one will be offered by purchasers of goods and the poorer one will be hoarded

Question 30

One characteristic of houses that makes them unsuitable as a medium of exchange is that they are not easily divisible.

Question 31

Whatever serves as a medium of exchange is

A)money
B)money, so long as it also is the best such medium of exchange available
C)money, so long as it is not also a commodity
D)money, so long as it is not also legal tender
E)not money unless it continues to be backed by its issuing institution

Question 32

Gresham's Law states that people

A)sell goods for money but prefer to buy goods with other goods
B)buy and sell goods with money
C)spend some money and hoard some money
D)spend lower-quality money and hoard higher-quality money
E)spend higher-quality money and hoard lower-quality money

Question 33

The Miwok Indians of Yosemite Valley used seashells as money. The advantages of seashells as money for these people included all of the following except one. Which is the exception?

A)It was difficult for anyone to get shells except by trading.
B)The shells were easily identifiable.
C)The shells were easy to carry.
D)The shells provided a money supply that was easily divisible.
E)The shells were intrinsically valuable as commodities.

Question 34

In general, the more money in existence, the better it functions as a store of value.

Question 35

In order for something to be used as money, it must be

A)issued by the government
B)issued by banks
C)declared to be money
D)generally acceptable
E)made of something valuable

Question 36

How does money function as a unit of account?

A)Money has intrinsic worth as a commodity.
B)Money is convertible into commodities that have intrinsic worth.
C)The prices of all goods and services are measured in terms of money.
D)Things that function as money can do so because people know there is a standard of value that ultimately backs the money even if it is only faith.
E)Bank accounts make it easy for people to store their wealth.

Question 37

Which of the following was the earliest type of money?

A)coins
B)barter
C)commodity money
D)token money
E)fiat money

Question 38

Which type of money has the lowest opportunity cost?

A)silver coin
B)gold coin
C)commodity money
D)token coins
E)fiat money

Question 39

The unit of account function of money

A)all of the following are correct
B)means that money makes the relative values of goods and services more easily known
C)requires that money be made of something valuable
D)means that money can be used to save up purchasing power
E)means that money is more easily counted than goods

Question 40

If people use quartz as a medium of exchange, then they

A)have a barter economy
B)are using commodity money
C)are using token money
D)are using legal tender
E)are using fiat money

Question 41

Seigniorage is

A)a retirement home for senior citizens
B)revenue earned from coining money
C)a fine paid by counterfeiters
D)the profits made by illegally "clipping" or "shaving" bits of precious metal from coins
E)the oldest known form of commodity money

Question 42

The reserve ratio is the ratio of

A)Federal Reserve member banks to nonmember banks
B)Federal Reserve nonmember banks to member banks
C)Federal Reserve member banks to all U.S. banks
D)Federal Reserve nonmember banks to all U.S. banks
E)a bank's reserves to its total deposits

Question 43

To make sure they can accommodate withdrawal requests at any time, banks must keep a dollar on reserve in the bank vault for each dollar of deposits.

Question 44

Under a fractional reserve banking system,

A)only a fraction of the banks in the system are allowed to create money
B)only a fraction of the banks in the system have reserves
C)the claims outstanding against the bank are only a fraction of the bank's total reserves
D)each bank must deposit a fraction of its reserves with the Federal Reserve Bank
E)bank reserves represent only a fraction of bank deposits

Question 45

Mary Ellen deposits $100 into her savings account every month. Her daughter Carolyn keeps all her pennies in a piggy bank. These are examples of money functioning as

A)a store of value
B)commodity money
C)a medium of exchange
D)a standard of deferred payments
E)a unit of account

Question 46

The currency of Camelot is the noble. King Arthur orders the minting of a five-noble gold coin, but it costs only four nobles to mine and process the amount of gold in the coin. Which of the following statements is true?

A)Five-noble coins will not be accepted in exchange.
B)Five-noble coins will be accepted only by the government.
C)When King Arthur spends these coins, he profits.
D)When King Arthur takes these coins in again in the form of taxes, he profits.
E)When these coins circulate through spending or taxation, King Arthur receives a profit of one noble, less seigniorage.

Question 47

A government receives seigniorage whenever it

A)sells gold to people for money
B)uses silver to buy gold from people, or vice versa
C)sells goods and services it produces for money
D)uses money to buy goods and services
E)mints coins whose face value is greater than the value of the resources used up in producing the money

Question 48

The original bankers were

A)seigniors
B)governments
C)savings and loan institutions
D)farmers
E)goldsmiths

Question 49

Any bank that uses deposits to make loans

A)operates on a 100 percent reserve system
B)operates on a fractional reserve system
C)does not operate on a reserve system
D)does not keep reserves
E)charges an interest rate determined by the reserve ratio

Question 50

Which of the following have, at one time or another, been part of the U.S. money supply?

A)seashells
B)platinum coins
C)token money
D)legal tender
E)private bank notes

Question 51

Gresham's Law states that when different forms of commodity money circulate simultaneously (e.g., $1 gold coins and $1 silver coins),

A)the one with the more intrinsic ("commodity") value will disappear from circulation
B)the one with the lesser intrinsic ("commodity") value will disappear from circulation
C)both will eventually have to be withdrawn from circulation by the government
D)the resultant disruption in the money markets will cause inflation
E)the resultant disruption in the money markets will cause a recession

Question 52

Whatever functions as money must be

A)authorized by the government
B)accepted for deposit by banks
C)backed by precious metals like gold or silver
D)completely indestructible
E)limited in supply

Question 53

The currency of Camelot is the noble. King Arthur orders the minting of a ten-noble gold coin, but it costs only seven nobles to mine and process the amount of gold in the coin. Which of the following statements is true?

A)Individuals outside the government will have an incentive to melt down the coin and use its contents, rather than its face value, in exchange.
B)King Arthur has an incentive to melt down the coin and use its contents, rather than its face value, in exchange.
C)The government loses seigniorage every time it spends new coins.
D)The government earns seigniorage every time it spends new coins.
E)The people of Camelot gain seigniorage on every private transaction.

Question 54

The first checks were probably notes written to a goldsmith asking him to transfer ownership of some designated amount of gold from the writer of the note to its bearer.

Question 55

Goldsmiths are considered to be the forerunners of modern banks because they

A)had safes to keep gold secure
B)issued gold coins
C)created money by lending out gold reserves
D)created legal tender
E)verified the quality of money

Question 56

If the cost of producing coins is lower than the face value of the coins, then the government receives revenue called

A)token money, and produces token coins
B)seigniorage, and produces fiat money
C)token money, and produces fiat money
D)seigniorage, and produces token coins
E)token money, and produces seignior coins

Question 57

Under a fractional reserve banking system, banks may lend out only a fraction of their reserves.

Question 58

The term seigniorage refers to

A)the conversion of paper money to a valuable commodity
B)clipping
C)revenue earned from the power to coin money
D)fiat money
E)none of the above

Question 59

Coins were minted with serrated edges

A)to make it obvious that they were made of cheap alloys
B)so that cheaper metals did not have to be used
C)to allow words to be printed on the border
D)to prevent the coins from being clipped
E)to make them jingle less when they rub together

Question 60

The currency of Camelot is the noble. King Arthur orders the minting of a five-noble gold coin, but it costs only four nobles to mine and process the amount of gold in the coin. Which of the following statements is true?

A)The seigniorage that King Arthur has to pay is five nobles.
B)The seigniorage that King Arthur has to pay is four nobles.
C)The seigniorage that King Arthur has to pay is one noble.
D)The five-noble coin is token money.
E)The five-noble coin is fiat money.

Question 61

In the world of banking, checks are

A)written instructions from a depositor to the bank
B)written instructions from one depositor to another depositor
C)a form of commodity money
D)token money
E)fiat money

Question 62

When prices rise,

A)the purchasing power of money increases
B)the purchasing power of money decreases
C)the purchasing power of money remains unchanged
D)the purchasing power of money either increases or decreases, depending upon the size of the national debt
E)the purchasing power of money either increases or decreases, depending upon the level of government expenditures

Question 63

An important function of commercial banks is to

A)print new currency
B)issue fiat money
C)mint coins
D)redeem currency for precious metals
E)make loans

Question 64

Fiat money

A)has value because people accept it
B)has intrinsic value
C)is backed by commodity reserves
D)is money because of its metallic content
E)is frequently "clipped"

Question 65

If money is acceptable because the government requires that it be accepted in payment for debt, the money is

A)legal tender
B)commodity money
C)guaranteed to be a good store of wealth
D)convertible to a valuable commodity
E)subject to Gresham's Law

Question 66

The value of money is determined by

A)people's belief that it is worth something
B)the amount of precious metal that the government holds to back the money
C)the money's market value as a commodity
D)the rate of interest, which is the price paid to borrow money
E)its ability to function as a unit of account

Question 67

In the United States economy which one of the following is not money?

A)a Susan B. Anthony $1 coin
B)a checking account at a bank
C)a 25-cent piece (i.e., a quarter)
D)a $20 Federal Reserve note
E)a $100 U.S. Government bond

Question 68

The U.S. dollar is a good example of fiat money.

Question 69

Money does not solve the double coincidence of wants problem unless it is generally acceptable.

Question 70

Money is legal tender if

A)people willingly accept it in payment of debts
B)it is backed by gold or silver
C)it is commodity money
D)the government says it is
E)it is in a bank account

Question 71

Fiat money is backed by

A)gold or silver
B)fractional reserves
C)the promise of a bank to redeem it upon presentation
D)the commodity in which it is denominated
E)nothing

Question 72

One problem with fiat money, as compared to commodity money, is that

A)more resources are used to create fiat money
B)there is frequently too little fiat money available
C)there is a greater potential for inflation with fiat money
D)fiat money must be turned in to the government to receive the commodity on which it is based
E)fiat money is less divisible than commodity money

Question 73

Suppose that partners Kemp and Sam open a goldsmith shop and general store in the Wild West. The more rapidly people "cash in" their bank notes,

A)the higher their profit from making loans will be
B)the lower their profit from the goods in the store
C)the fewer bank notes they will be able to issue
D)the larger the denominations in which they will have to issue bank notes
E)the smaller their reserve ratio

Question 74

Which of the following are legal tender?

A)checks
B)Federal Reserve notes
C)bank notes issued by private banks
D)credit cards
E)traveler's checks

Question 75

Bank notes created by a goldsmith in a fractional reserve system were

A)not backed by anything of value
B)commodity money, since they were backed by gold
C)not commodity money fully, since not all the gold was there
D)representative of commodity money
E)fiat money

Question 76

Fractional reserve banking occurs when

A)a bank has reserves that exceed its deposits
B)a bank has reserves that are equal to its deposits
C)a bank has reserves that are less than its deposits
D)some depositors lose their deposits through poor bank management
E)some lenders fail to repay their loans

Question 77

The value of money is fundamentally determined by the

A)reputation of the bank that holds it
B)reputation of the person who holds it
C)gold or silver for which it can be redeemed
D)value of the commodities for which it can be traded
E)value of comparable stocks and bonds

Question 78

The first bankers were probably

A)carpenters
B)stock brokers
C)goldsmiths
D)sea captains
E)grain merchants

Question 79

The U.S. dollar is backed by gold.

Question 80

Paper money is a good example of commodity money.